Is workforce turnover in nursing homes costly?

Staff turnover rates in nursing homes (NHs) have been persistently high for decades, ranging upwards of 100%. They are associated with poor quality but there is no empirical evidence about their cost implications. In this study of 902 NHs in California in 2005 we estimated the net costs associated with turnover of direct care staff.

Using Medicaid cost reports, the Minimum Data Set (MDS), Medicare enrollment files, Census and Area Resource File (ARF), we estimated the relationship between cost and turnover using cost functions, which included exogenous outputs and wages. We used instrumental variable (IV) limited information maximum likelihood techniques to account for the endogeneity of turnover and costs.

The average NH turnover rate was 62%, and it was highly variable, with a coefficient of variation of 65%. The average NH cost was $5.6 million. The IV estimate of the marginal cost of turnover was negative and significant (p=0.030). The marginal cost savings associated with a 10 percentage point increase in turnover for an average facility was $167,063 or 2.9% of annual costs. A NH operating at the 75th percentile versus the 25th percentile of turnover, i.e. 78% versus 38%, would experience a cost saving of $668,252.

The net savings associated with turnover offer an explanation for the persistence of this phenomenon over the last decades, despite the many policy initiatives to reduce it. Future policy efforts need to recognize that the relationship between turnover and costs is complex and may need to be addressed with financial incentives.